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FORM 10-K
ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) FOR THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from_________________to_______________________________
Commission file number 0-22319
PATIENT INFOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1476509
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
46 Prince Street, Rochester, NY 14607
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 242-7200
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class registered Name of each exchange on which
registered
None
----
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock, $.01 Par Value Per Share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 1999, 8,020,042 shares of common stock were outstanding,
and the aggregate market value of the common shares of Patient Infosystems, Inc.
held by non-affiliates was approximately $8 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders to be filed prior to April 30, 1999 are incorporated by reference
in Part III.
PART I
Item 1. Description of Business.
General
Patient Infosystems, Inc. (the "Company" or "Patient Infosystems") was
incorporated in the State of Delaware on February 22, 1995 under the name DSMI
Corp., changed its name to Disease State Management, Inc. on October 13, 1995,
and then changed its name to Patient Infosystems, Inc. on June 28, 1996. The
Company's principal executive offices are located at 46 Prince Street,
Rochester, New York 14607 and its telephone number is 716-242-7200.
Patient Infosystems provides patient-centered health care information
systems and services to manage, collect and analyze information to improve
patient compliance with prescribed treatment protocols, to improve the process
of off-site patient management and to enhance patient and provider information.
The Company's technology platform integrates an advanced voice recognition
telephone system, high speed data processing and analysis capability, and demand
publishing and information distribution capabilities, utilizing the Internet and
Internet technologies. The system utilizes trained telephone operators and
computerized interactive voice response technology and behavior modification
based treatment to communicate via telephone directly with the patient at home
in order to gather relevant patient data. This data is subsequently evaluated
and automatically transmitted via computer generated reports to health care
payors, providers and patients, with these reports being tailored to the
specific needs of each recipient. The Company markets its services to
pharmaceutical manufacturers, pharmacy benefit managers ("PBMs") and health care
payors, such as managed care organizations ("MCOs"), integrated delivery
networks ("IDNs") and insurance companies and health care providers, to collect
data outside of the physician office and institutional setting to enhance
compliance by patients with prescribed treatment protocols. The Company`s
systems may also be used to address the full spectrum of health care information
needs with respect to care quality, patient satisfaction and patient and
provider education.
During its first two years of operations, the Company emphasized the
development of disease management programs, which accounted for a substantial
portion of its revenue during 1997. However, during 1997 and 1998, the Company
devoted increased resources to the development of other applications of its
technology platform, including demand management, patient surveys and outcomes
analysis.
Information Capture, Delivery and Analysis Technologies Utilizing the Internet
The Company's technology platform integrates an advanced voice recognition
telephone system, high speed data processing and analysis capability, demand
publishing and information distribution capabilities and behavior modification
based compliance algorithms with a real time Internet on-line communication
system . The system utilizes trained telephone operators and computerized
interactive voice response technology to communicate via telephone directly with
the patient at home as well as with payors and providers in order to gather and
deliver relevant patient data. In order to minimize costly live operator
interaction, a computer initiates each call to the patient, which call is
automatically transferred to an operator and finally routed to an automated
speech application. Patients respond to the recorded speech application by
speaking normally. This approach is designed to enable a wider variety of
possible responses than is achievable via telephone key pad. Depending on the
patient's response, situation-specific algorithms are applied to modify future
questions and thus help customize the collection of data.
The Company's system analyzes and prepares the captured data for automatic
delivery to the payor, provider and patient using the Internet and demand
publishing capabilities. The Company's new Internet capabilities acquired with
the HealthDesk purchase enables the Company's systems to interface on a real
time basis with patients, payors and providers. Demand publishing technology
enables the creation of highly individualized reports by inserting stored
graphic images and text which can be customized for race, gender and age. These
reports are also customized to the patient's specific situation, and the system
utilizes the information received during contacts with the patient to further
customize the content of the report. The data relevant to the separate report
for health care providers is formatted in a customized report to be
automatically transmitted via mail, fax or on-line.
Each contact with a patient contributes to the establishment of a
longitudinal data base which can be analyzed to provide information about
treatment modalities for patients, providers and payors. The Company's system is
designed to analyze patient compliance to prescribed treatment regimens and
gather additional clinical information so that improvements in such regimens can
be developed.
Internet Capabilities
On February 26, 1999, the Company, through its newly formed, wholly-owned
subsidiary, Patient Infosytems Acquisition Corp., acquired substantially all the
assets of HealthDesk Corporation ("HealthDesk"), a consumer healthcare software
company that focuses on general health and chronic disease management through
ongoing targeted support for patients, families and caregivers. The acquired
assets include HealthDesk OnLine and HealthDesk OnLine for Diabetes, which are
both accessible through the Internet and on CD-ROM. The Company also acquired
HealthDesk's Care Team Connect product, which is accessible over the Internet
and provides a communication mechanism between patients and their caregivers.
The Company uses the core technologies associated with these products to support
the Company's other programs which include disease management, case management,
demand management, patient surveys and clinical studies. (See Note 10 to
financial statements)
Integrated Disease State Management System
The Company's first application of its integrated information capture and
delivery technology is its integrated disease state management system. This
system is designed to provide caregivers with the ability to monitor, on a
cost-effective basis, patient condition and behavior while the patient is
between physician consultations. The Company believes that this will permit
caregivers to improve patient compliance and, as a consequence, improve patient
outcomes.
The Company's disease state management system has three primary components.
First, using a panel of recognized medical and clinical experts, the Company
develops a disease-specific patient intervention and compliance program that
includes a template for the integration of each patient's history, current
medical status and treatment protocol. If the program is being developed on a
custom basis for a particular customer, the program is developed in consultation
with the customer's clinical staff and consultants. Second, the Company
establishes periodic telephone contacts with each patient to monitor the
patient's compliance with prescribed therapies as well as the patient's
treatment progress. Third, using the information obtained from patient contacts
and other available information regarding the patient and his or her treatment,
such as physician records and pharmacy information, personalized reports are
prepared, typically following each patient contact, for evaluation by the
patient, the patient's health care provider and, on a routine basis, payors.
Development of Disease-Specific Protocols
The Company's disease-specific compliance programs are developed for
targeted diseases either on a customized or standardized basis. The Company
retains an internal clinical staff and panels of independent medical and
clinical experts to identify guidelines of generally accepted treatment
protocols and diagnostic interventions for particular diseases. These guidelines
serve as a template for information to be gathered from each patient. If the
program is being developed on a custom basis for a particular customer, the
program is developed in consultation with the customer's clinical staff and
consultants. In addition, the Company's internal clinical staff conducts
research of available databases and gathers information provided by medical
experts, insurance providers, governmental agencies, Medicare and Medicaid and
other sources to develop with the medical experts the disease-specific program
structure. The resulting compliance protocols are designed to enable the Company
to gather the necessary patient information to determine the extent of a
patient's compliance with his or her prescribed treatment, the effectiveness of
treatment and the progress of the patient's disease. As the Company's database
of disease-specific treatments expands, the Company intends to use that data to
modify, update and enhance its own disease state management compliance programs
and assist health care providers in improving treatment protocols.
Patient Enrollment
When a patient is enrolled in one of the Company's disease state management
programs a patient history is obtained, including the histories of the chronic
illness, medications, and surgical procedures as well as other information
deemed relevant by the disease-specific compliance program. This information is
included in the Company's database for each patient and is used to create
customized reports for distribution to each of the patient's health care
provider and payor as well as the patient. The patient report can include
information on the prescribed treatment of the patient's disease as well as the
use of the program and social support services to improve compliance with the
patient's treatment regimen. In addition, the Company's demand publishing
technology provides personalized behavior modification and educational materials
for the patient. The health care provider report contains the relevant clinical
and behavioral information gathered from the patient.
The Company has found patient enrollment to be one of the particularly
challenging components to establishing effective programs. Although the Company
has completed the development of several disease management programs, the
Company's customers have been able to provide only limited patients to enroll in
the programs. To the extent that the Company's revenue is dependent upon the
number of contacts it is able to achieve, it will be required to work closely
with its customers to develop methods to increase patient enrollment.
Patient Contacts
In accordance with a designated patient contact schedule, a patient will
periodically receive telephone calls from a live operator who, after confirming
the identity of the patient, will transfer the patient to an automated system
that will ask specific questions determined in accordance with the
disease-specific compliance program and provide information and motivational
feedback. Patient contact schedules are established for each disease state
management program, with the frequency of patient contact varying with the
disease under management and the goal of the applicable treatment and occurring
as often as daily or as infrequently as on a quarterly basis. The data gathered
from the patient during each contact is processed and stored in the Company's
database.
The compliance program takes into account patient responses to treatment
follow-up questions and initiates specific courses of action which can include
positive reinforcement messages, confirmation of prescription instructions and
scheduled callbacks to remind the patient of the need to take prescribed
medication. In addition, questions to be asked in future calls are modified
based upon the patient's responses during previous calls.
The Company's disease state management system captures and processes the
information obtained from the patient during the contact and integrates this
information with the other data maintained by the Company, including prior
patient responses, patient medical history, treatments administered to date and
the mandated treatment protocols for the disease. This system automatically
prepares distinct reports using the Company's demand publishing technologies for
the patient and for the physician or other caregiver. Each report is tailored
for the particular requirements of each recipient. The patient's report, for
example, may include pictures, diagrams and informative discussions relating to
the treatment course intended to modify or reinforce certain behaviors. The
physician's report would likely be more factual and direct and summarize the
clinical and behavioral information that has been gathered.
On a routine basis the Company will provide data to the patient's health
care payor with respect to that patient's progress. The Company will be able to
include information from various data sources in these reports for the purpose
of providing additional information with respect to a patient. For example, the
Company may be able to interact with the pharmacy services division of a payor
to determine the renewal frequency of prescriptions, which provides an
indication of whether a patient is taking his or her medication. In addition,
the system provides the flexibility to allow other information from physicians'
reports and hospital tests to be included in the periodic reports.
Compliance Assistance
The Company assists payors and health care providers in monitoring patient
compliance and works with health care providers to develop compliance and
education programs that can be implemented through the Company's system. The
Company's publishing technology enables production of patient-specific
compliance and education literature that is customized for an individual
patient. Once this literature is prepared it may be delivered to a patient by
mail, facsimile or on-line. In addition, the Company can implement a variety of
procedures including medication reminders via wireless two-way communication and
more frequent telephone communications for non-compliant patients or patients
with more difficult treatment regimens. The Company can provide additional
support services, such as an 800 number that will provide recorded information
with respect to a variety of patient education topics or other support messages.
Patient Infosystems Programs
The Company is developing customized disease state management and risk
assessment programs in conjunction with a number of customers, as well as
standardized disease state management programs in the areas of asthma, diabetes
and hypertension. Each of the Company's customer agreements for its customized
programs provide for development fees to be paid to the Company upon the
achievement of certain milestones. In addition, the agreements for customized
disease state management programs may provide for some form of exclusivity
period, during which the Company is prohibited from engaging or participating in
other projects involving the specific disease target that is the subject of that
program. The exclusivity periods extend until, in general, a certain date or
certain period (ranging from eight to 24 months) following the achievement of a
specified milestone in the development or implementation of the program. The
Company enrolled its first patients in a disease state management program in
October 1996, and has less than 20,000 patients currently enrolled in those
programs.
All of the Company's customer agreements, which are typically terminable
without cause by either party, require payment to the Company of operational
fees per enrolled patient. The amount of the per patient program operational fee
varies with the length, complexity and frequency of patient contacts as dictated
by the respective program protocols. Patient enrollment in each of the Company's
programs will depend upon the identification and referral by the Company's
customers of patients to the Company's system which will vary from program to
program.
The Company has developed or is developing programs in the following areas:
Asthma
The Company has developed a disease state management program for asthmatic
patients that has been marketed to payors and other participants in the health
care industry, and such program has been provided to patients since January
1997. Through February 1999, the Company has had approximately 4,100
interventions with patients participating in these programs. American
HomePatient, Inc. ("American HomePatient"), Centra Healthcare Administrative
Services, Inc. ("Centra"), Harris Methodist Health Plan ("Harris Methodist") and
Health Alliance, a Division of Astra Pharma Inc. ("Health Alliance") have
retained the Company to provide disease state management programs for patients
who are suffering from asthma and are enrolled in health care programs for which
these companies provide services.
Congestive Heart Failure
The Company has a services agreement with Bristol-Myers to develop,
implement and operate a disease state management program to aid in the treatment
of patients suffering from congestive heart failure. The Company has completed
the development of the program in congestive heart failure in the English
language, and is currently developing the program in the Spanish language. This
program has been provided to patients since April 1997, and through February
1999, the Company has had approximately 9,900 interventions with patients
participating in this program.
Diabetes
The Company has developed a disease state management program for diabetic
patients that has been marketed to payors and other participants in the health
care industry. Bristol-Myers, Centra and Health Resources have retained the
Company to provide this disease state management program for patients who are
suffering from diabetes and are enrolled in health care programs for which these
companies provide services. These programs have been provided to patients since
August of 1997, and through February 1999, the Company has had approximately
2,600 interventions with patients participating in these programs.
Secondary Cardiovascular Disease
The Company has entered into a services agreement with Bristol-Myers to
develop, implement and operate a disease state management program relating to
the prevention of cardiovascular sequelae in patients who have recently
experienced certain cardiovascular illnesses or treatments such as angina,
cardiac bypass surgery or myocardial infarction. The Company has completed the
development of this program in the English language and is continuing to develop
the program in the Spanish language. This program has been provided to patients
since January 1997, and through February 1999, the Company has had 115
interventions with patients participating in this program.
Hypertension
The Company has completed the development of a compliance program for
patients with hypertension that has been marketed to payors and other
participants in the health care industry. Bristol-Myers has retained the Company
to provide this compliance program for patients who are suffering from
hypertension and are enrolled in health care programs for which these companies
provide services. Patients are currently being enrolled into this program.
Additional Disease Targets
The Company has identified additional opportunities in large chronic
disease markets, including in the treatment of, chronic obstructive pulmonary
disease, depression, cancer, osteoporosis, arthritis, HIV infection and high
risk pregnancy. Each of these targets has been identified as having
characteristics which make them attractive candidates for the Company's
programs. The Company is currently involved in discussions with customers for
the development of programs in a variety of these areas.
Significant Customer Concentration
The Company's current contracts are concentrated in a small number of
customers, with several of the Company's most significant contracts being with
Bristol-Myers and Aetna U.S. HealthCare. The Company expects that its sales of
services will be concentrated in a small number of customers for the foreseeable
future. Consequently, the loss of any one of its customers could have a material
adverse effect on the Company and its operations. There can be no assurance that
customers will maintain their agreements with the Company, enroll a sufficient
number of patients in the programs developed by the Company for the Company to
achieve or maintain profitability, or that customers will renew their contracts
upon expiration or on terms favorable to the Company.
Other Applications of the Integrated Information Capture and Delivery Technology
Demand Management
Demand management involves assisting providers in evaluating patient
treatment needs to identify those patients who may not require immediate or
intensive services. The goal of demand management is to reduce the need for and
use of costly, often clinically unnecessary, medical services and arbitrary
managed-care interventions while improving the overall quality of life of
patients. The Company believes that its system can be used to provide automated
or semi-automated demand management services. The Company is currently providing
demand management to approximately 150,000 patients for Kentucky Medicaid, CHA
HMO, Inc. and Managed Care Assistance Corporation.
Outcomes Analysis
The Company intends to utilize information gathered from patients enrolled
in its programs to serve two purposes. First, information regarding treatment
results, success of the compliance program and patient reaction to differing
treatments or compliance protocols may be used by the Company to further improve
each disease-specific compliance program. Second, this information may be used
by payors, pharmaceutical companies and health care providers to assist in the
development of improved treatment modalities. The Company has developed
analytical methodologies using database management and information technologies.
The Company intends to use these data analysis technologies to predict the best
treatment methodologies for patients.
Clinical Studies
Many pharmaceutical companies and contract research organizations are
seeking more economical, efficient and reliable methods for compiling and
analyzing clinical data in conducting clinical trials. Furthermore, many drug
development protocols have begun to emphasize subjective criteria and outcomes
information. The Company believes that its system will allow it to develop
programs tailored to the measurement of outcomes data relating to the conduct of
later stage clinical trials. The Company believes that its system can also
assist pharmaceutical companies in studying and documenting the efficacy of
approved products in order to provide ongoing information to FDA or for
marketing purposes.
Patient Surveys
Organizations in many different areas of the health care industry survey
users regarding their products and services for a variety of reasons including
regulatory, marketing and research purposes. The Company's information systems,
with their ability to proactively contact patients in a cost-efficient manner,
may be used for this type of application. The Company has developed a series of
10 automated surveys ranging from general health to disease specific
instruments. The product line includes surveys for SF-12; child health
questionnaire; patient satisfaction; asthma; diabetes; back pain; depression;
prostatis; maternity; and the Pra Plus for elderly populations. The Company has
completed approximately 125,000 surveys during 1998 through February 1999.
Case Management
Patients who are prescribed complex or high cost treatment regimens may
require a higher level of monitoring, interaction, care planning and
reassessment than patients with less complicated treatment regimens. The Company
believes that its system is capable of providing these enhanced services to such
patients to eliminate or minimize the unnecessary costs and medical attention
that result from a patient's lack of compliance with a prescribed treatment
regimen.
Sales and Marketing
Through 1997, the Company's efforts focused primarily on the development of
disease management programs. During 1998, the Company began aggressively
marketing the other services that its technology platform can provide including
demand management, patient surveys and outcomes analysis. The Company markets
its integrated disease state management system to organizations within the
health care industry that are involved in the treatment of disease or payment of
medical services for patients who require complex or long-term medical
therapies. These industry organizations include five distinct groups:
pharmaceutical companies, medical service companies, PBMs, health care payors
and employer groups. The Company employs a sales and marketing staff of twelve
persons to market the Company's systems. In addition, the senior members of the
Company's management are actively engaged in marketing the Company's programs.
The Company has expanded its marketing efforts by conducting patient
surveys, clinical studies and implementing other measures designed to document
the clinical and cost benefits it believes will result from the application of
its integrated information capture and delivery system. In collaboration with
the members of its expert panels who are retained to develop program protocols
and other research and clinical technicians, the Company intends to promote the
benefits of its system through publication in clinical journals and
presentations at scientific conferences of the results of these studies. The
Company is conducting such studies designed to produce significant short-term
data with respect to its asthma, diabetes and cardiac programs.
The Company entered into a joint venture agreement with MacLean Hunter
Publishing Limited, an Ontario, Canada corporation, in November 1998 to market
and sell, on an exclusive basis in Canada, products and services developed by
the Company and to manage jointly, finance and operate the business entity
Patient Infosystems Canada, Inc., which is dedicated to the development of a
commercially viable business built around the sale, marketing and service of the
Company's products and services.
Research and Development
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to the Company's research and
development personnel for development of certain components of its integrated
information capture and delivery system, as well as development of the Company's
standardized disease state management programs. Research and development costs
have decreased as the Company has completed the development of its primary
disease management programs. The Company anticipates that research and
development expenses will continue to decrease in future periods, as the Company
continues to expand its operations.
The development and maintenance of the telecommunications and computer
publishing systems through which the Company operates its integrated information
capture and delivery system is a major component of its business. The
communications and information technology industries are subject to rapid and
significant technological change, and the ability of the Company to operate and
compete is dependent in significant part on its ability to update and enhance
its system continuously. In order to do so, the Company must be able to utilize
effectively its research and development capabilities and implement new
technology in order to enhance its systems. At the same time, the Company must
not jeopardize its ability to contact patients and to process and publish
patient information or adapt to customer preferences or needs. The Company will
maintain a significant investment in its technology, and therefore is subject to
the risk of technological obsolescence.
Competition
The market for health care information products and services is intensely
competitive. Competitors vary in size and in scope and breadth of products and
services offered, and the Company competes with various companies in each of its
disease target markets. Many of the Company's competitors have significantly
greater financial, technical, product development and marketing resources than
the Company. Furthermore, other major information, pharmaceutical and health
care companies not presently offering disease state management or other health
care information services may enter the markets in which the Company intends to
compete. In addition, with sufficient financial and other resources, many of
these competitors may provide services similar to those of the Company without
substantial barriers. The Company does not possess any patents with respect to
its integrated information capture and delivery system, and although it has
filed a patent application with respect to certain aspects of its integrated
information capture and delivery system and its integrated disease state
management system, there can be no assurance that this application will result
in the issuance of a patent, or if issued, that a patent would provide the
Company with any competitive advantage.
The Company's potential competitors include specialty health care
companies, health care information system and software vendors, health care
management organizations, pharmaceutical companies and other service companies
within the health care industry. Many of these competitors have substantial
installed customer bases in the health care industry and the ability to fund
significant product development and acquisition efforts. The Company will also
compete against other companies that provide statistical and data management
services, including clinical trial services to pharmaceutical companies.
The Company is aware of several large pharmaceutical and medical service
companies that have publicly stated that they intend to be involved in providing
comprehensive disease state management services. The Company believes that the
principal competitive factors in its market are the ability to link patients,
health care providers and payors, and provide the relevant health care
information at an acceptable cost. In addition, the Company believes that the
ability to anticipate changes in the health care industry and identify current
needs are important competitive factors.
Quality Control
The Company has developed quality control measures designed to insure that
information obtained from patients is accurately transcribed, that reports
covering each patient contact are delivered to health care providers and
patients and that the Company's personnel and technologies are interacting
appropriately with patients and health care providers. Quality control systems
include random monitoring of telephone calls, patient surveys to confirm patient
participation and effectiveness of the particular program, and supervisory
reviews of telephone agents.
Government Regulation
The health care industry, including the current and proposed business of
the Company, is subject to extensive regulation by both the Federal and state
governments. A number of states have extensive licensing and other regulatory
requirements applicable to companies that provide health care services.
Additionally, services provided to health benefit plans in certain cases are
subject to the provisions of the Employee Retirement Income Security Act
("ERISA") and may be affected by other state and Federal statutes. Generally,
state laws prohibit the practice of medicine and nursing without a license. Many
states interpret the practice of nursing to include health teaching, health
counseling, the provision of care supportive to or restorative of life and well
being and the execution of medical regimens prescribed by a physician.
Accordingly, to the extent that the Company assists providers in improving
patient compliance by publishing educational materials or providing behavior
modification training to patients, such activities could be deemed by a state to
be the practice of medicine or nursing. Although the Company has not conducted a
survey of the applicable law in all 50 states, it believes that it is not
engaged in the practice of medicine or nursing. There can be no assurance,
however, that the Company's operations will not be challenged as constituting
the unlicensed practice of medicine or nursing. If such a challenge were made
successfully in any state, the Company could be subject to civil and criminal
penalties under such state's law and could be required to restructure its
contractual arrangements in that state. Such results or the inability to
successfully restructure its contractual arrangements could have a material
adverse effect on the Company.
The confidentiality of patient information is subject to regulation by
state law. A variety of statutes and regulations exist safeguarding privacy and
regulating the disclosure and use of medical information. State constitutions
may provide privacy rights and states may provide private causes of action for
violations of an individual's "expectation of privacy." Tort liability may
result from unauthorized access and breaches of patient confidence. The Company
intends to comply with state law and regulations governing medical information
privacy.
In addition, on August 21, 1996 Congress passed the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"), P.L. 104-191. This
legislation requires the Secretary of the Department of Health and Human
Services to adopt national standards for electronic health transactions and the
data elements used in such transactions. The Secretary is required to adopt
safeguards to ensure the integrity and confidentiality of such health
information. Violation of the standards is punishable by fines and, in the case
of wrongful disclosure of individually identifiable health information,
imprisonment. The Secretary has promulgated and published proposed rules
addressing the standards, however, no final rules have been adopted to date.
Final rules may be adopted during 1999.
The Company and its customers may be subject to Federal and state laws and
regulations which govern financial and other arrangements between health care
providers. These laws prohibit certain fee splitting arrangements between health
care providers, as well as direct and indirect payments, referrals or other
financial arrangements that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. Possible sanctions for violation of these restrictions
include civil and criminal penalties. Specifically, HIPAA increased the amount
of civil monetary penalties from $2,000 to $10,000. Criminal penalties range
from misdemeanors, which carry fines of not more than $10,000 or imprisonment
for not more than one year, or both, to felonies, which carry fines of not more
than $25,000 or imprisonment for not more than five years, or both. Further,
criminal violations may result in permanent mandatory exclusions and additional
permissive exclusions from participation in Medicare and Medicaid programs.
Furthermore, the Company and its customers may be subject to federal and
state laws and regulations governing the submission of false healthcare claims
to the government and private payers. Possible sanctions for violations of these
laws and regulations include minimum civil penalties between $5,000-$10,000 for
each false claim and treble damages.
Regulation in the health care field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's business could be adversely
affected by the failure to obtain required licenses and governmental approvals,
comply with applicable regulations or comply with existing or future laws, rules
or regulations or their interpretations.
Intellectual Property
The Company considers its methodologies, processes and know-how to be
proprietary. The Company seeks to protect its proprietary information through
confidentiality agreements with its employees. The Company's policy is to have
employees enter into confidentiality agreements containing provisions
prohibiting the disclosure of confidential information to anyone outside the
Company, requiring employees to acknowledge, and, if requested, assist in
confirming the Company's ownership of any new ideas, developments, discoveries
or inventions conceived during employment, and requiring assignment to the
Company of proprietary rights to such matters that are related to the Company's
business.
Employees
As of February 28, 1999, the Company had 121 full and part-time employees.
Financial Information
For financial information concerning the Company, see the financial
statements and the notes thereto included elsewhere herein.
Item 2. Description of Properties.
The Company's executive and corporate offices are located in Rochester, New
York in approximately 13,000 square feet of leased office space under an
operating lease that expires on November 30, 1999. The Company leases office
space for its Demand Management call center in Wayne, Pennsylvania in
approximately 2,047 square feet of leased office space under a lease agreement
that expires in May 2001. The Company leases office space for its Berkeley,
California office in approximately 2,800 square fee of lease office space under
a lease agreement that expires in October 1999.
The Company believes its plants and facilities are suitable and adequate,
and have sufficient productive capacity, to meet its current needs.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters To A Vote Of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
(a) Market Information
The Company's common stock is traded on the NASDAQ National Market System
under the symbol "PATI". The following table sets forth, for the periods
indicated, the range of the high and low closing sale price for the Company's
Common Stock as reported on the NASDAQ National Market.
High Low
1997
First Quarter $9.25 $6.38
Second Quarter $6.25 $4.50
Third Quarter $5.00 $2.88
Fourth Quarter $4.38 $2.63
1998
First Quarter $4.50 $2.63
Second Quarter $5.00 $2.50
Third Quarter $3.44 $1.81
Fourth Quarter $1.88 $1.00
(b) Holders
The approximate record number of holders of the Company's common stock as
of February 28, 1999 is 87. However, the Company believes that there are in
excess of 400 beneficial holders of Common Stock of the Company.
(c) Dividends
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain all future earnings, if any, to fund the development
and growth of its business. Any future determination to pay cash dividends will
be at the discretion of the Board of Directors.
(d) Use of Proceeds
The Company has used and continues to use the proceeds from its initial
public offering of common stock in December 1996 for capital improvements and
expansion of its telephone and computer capabilities for sales and marketing and
for general corporate purposes as more fully discussed in financial statements
and notes thereto appearing elsewhere herein. Recently, the Company used
$761,000 in connection with the acquisition of the assets of HealthDesk.
Item 6. Selected Financial Data.
Period from
February 22, 1995
(Inception) to
Year Ended December 31, December 31,
----------------------- ------------
1998 1997 1996 1995
---- ---- ---- ----
Statement of Operations Data:
Revenues ........................... $ 2,344,072 $ 2,062,373 $ 845,412 $ 113,000
Costs and Expenses:
Cost of Sales ..................... 2,529,619 1,629,128 748,322 111,870
Sales and Marketing ............... 1,795,921 1,609,837 913,547 375,384
General and Administrative ........ 3,062,204 2,442,269 1,759,044 678,498
Research and Development .......... 298,686 489,115 310,552 89,909
------- ------- ------- ------
Total Costs and Expenses ........ 7,686,430 6,170,349 3,731,465 1,255,661
--------- --------- --------- ---------
Operating Loss ...................... (5,342,358) (4,107,976) (2,886,053) (1,142,661)
Other Income and Expenses ........... 556,592 835,116 81,333 26,009
Provision for taxes ................. 43,701 (9,509) 1,716 --
------ ------ ----- -----
Net Loss .......................... $(4,829,467) $ (3,263,351) $ (2,806,436) $ (1,116,652)
============ ============ ============ ============
Net Loss Per Share - Basic
and Diluted ........................$ (0.60) $ (0.41) $ (0.44) $ (0.18)
============ ============ ============ ============
Weighted Average Common
and Potential Common Shares ...... 8,018,398 7,980,094 6,347,716 5,954,299
========= ========= ========= =========
Year Ended December 31,
-----------------------
1998 1997 1996 1995
---- ---- ---- ----
Balance Sheet Data:
Cash and Cash Equivalents ....... $ 6,316,955 $ 779,317 $ 15,666,609 $ 1,182,080
Working Capital ................. 7,992,894 13,242,387 14,591,700 611,655
Total Assets .................... 10,519,727 15,036,473 17,085,387 1,763,629
Total Liabilities ............... 894,339 587,728 1,631,650 598,464
Total Stockholders' Equity ...... 9,625,388 14,448,745 15,453,737 1,165,165
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis provides a review of the Company's
operating results for the years ended December 31, 1998, 1997 and 1996, and its
financial condition at December 31, 1998. The focus of this review is on the
underlying business reasons for significant changes and trends affecting the
revenues, net earnings, and financial condition of the Company. This review
should be read in conjunction with the accompanying financial statements.
In an effort to give investors a well-rounded view of the Company's current
condition and future opportunities, this Annual Report on Form 10-K includes
forecasts by the Company's management about future performance and results.
Because they are forward-looking, these forecasts involve uncertainties. They
include risks of market acceptance of or preference for the Company's systems
and services, competitive forces, the impact of, and changes in, government
regulations, general economic factors in the healthcare industry, and other
factors discussed in the Company's filings with the Securities and Exchange
Commission.
Overview
The Company was formed on February 22, 1995 and has a limited operating
history from which to evaluate its performance. Although the Company has
completed the development of its integrated information capture and delivery
system and has developed several disease state management programs for specific
diseases, the Company is continuing to refine its products for additional
applications. In October 1996 the Company began enrolling patients in its first
disease state management program and only began substantial patient contacts
during 1998. The Company currently has patients enrolled in five of its
disease-specific programs. Through February 1999, an aggregate of approximately
350,000 persons have enrolled and participated in Company programs. The
enrollment of patients in the Company's programs has been limited by several
factors, including the limited ability of clients to provide the Company with
accurate information with respect to the specific patient populations, including
coding errors that necessitated extensive labor intensive data processing prior
to program implementation. In addition, the Company has encountered resistance
from patients and other sources of information to the Company's systems.
In response to these market dynamics, the Company has taken several
tactical and strategic steps including, formal designation of internal personnel
at customer sites to assist clients with implementation; closer integration of
Company systems personnel with clients to facilitate accurate data transfers;
and most importantly, promotion of a broader product line to enable clients to
enter the Company's disease management programs through a variety of channels.
The Company now markets two additional services, demand management services and
automated surveys (general health and disease-specific), both of which can
provide mechanisms for enrollment to the Company's disease management programs.
Nevertheless, no assurance can be given that the Company's efforts will succeed
in increasing patient enrollment in Company programs.
The Company has entered into services agreements to develop, implement and
operate programs for: (i) patients who have recently experienced certain
cardiovascular events; (ii) patients who have been diagnosed with primary
congestive heart failure; (iii) patients suffering from anorexia or cachexia
secondary to diagnosis of cancer or AIDS; (iv) patients suffering from chronic
pain, and (v) patients who are at increased risk of suffering from epilepsy. In
addition, the Company has entered into services agreements to operate its
disease management programs for patients suffering from asthma, diabetes and
hypertension. These contracts provide for, and the Company anticipates future
contracts will provide for, fees paid by its customers based upon the number of
patients participating in each of its programs, as well as initial program
development fees from customers for the development of a disease-specific
program. To the extent that the Company has had limited enrollment of patients
in its programs, the Company's operations revenue has been, and may continue to
be limited. Moreover, as the Company has completed the development of its
primary disease management programs, it anticipates that development revenue
will also decline over the next twelve months unless and until the Company
enters into new development agreements. The Company's program development
contracts typically require payment from the customer at the time that the
contract is executed, with additional payments made as certain development
milestones are met. Development contract revenue is recognized on a percentage
of completion basis, in accordance with the ratio of total development cost
incurred to the estimated total development costs for the entire project.
Losses, if any, related to program development will be recognized in full as
identified. The Company's contracts call for a fixed program operational fee to
be paid by the customer for each patient enrolled for a series of program
services as defined in the contract. The timing of customer payments for the
delivery of program services varies by contract. Revenues from program
operations are recognized ratably as the program services are delivered. The
amount of the per patient fee varies from program to program depending upon the
number of patient contacts required, the complexity of the interventions and the
detail of the reports generated. The Company has not capitalized any costs
related to the development of software for use in its disease state management
programs since all of such software has been developed for internal use.
Revenues from Operations, which includes fees received by the Company for
operating its programs has increased substantially and has become the most
significant source of the Company's revenues. Furthermore, as enrollment in
Company operated disease management programs continues to increase, the Company
anticipates that these revenue sources will become the primary source of the
Company's revenues. Currently, the Company's demand management programs generate
more revenue than the Company's disease management programs. However, the
Company is continuing to devote significant marketing efforts to increasing the
number of disease management programs that are in operation. Nevertheless, the
Company is still supporting a substantial infrastructure in maintaining the
capacity necessary to deliver its services and to offer its services to new
customers. Therefore, the Company will be required to increase substantially the
number of patient contacts and management programs to cover the costs necessary
to maintain the capability to service its customers. In that the Company has
only begun substantial patient contacts during 1998, the Company is continually
examining its costing structures to determine the levels that will be necessary
to achieve profitability.
The sales cycle for the Company's programs may be extensive from initial
contact to contract execution. During these periods, the Company may expend
substantial time, effort and funds to prepare a contract proposal and negotiate
the contract. The Company may be unable to consummate a commercial relationship
after the expenditure of such time, effort and financial resources.
The Company began to provide other services to customers in the healthcare
industry during 1997 which included new applications of its information capture
and delivery system. These consisted of patient surveys, health risk
assessments, nursing support lines and marketing support functions.
In February, 1999, the Company, through its newly formed, wholly-owned
subsidiary, Patient Infosystems Acquisition Corp., acquired substantially all of
the assets of HealthDesk Corporation, a consumer healthcare software company,
primarily engaged in the business of designing and developing Internet based
products in the healthcare, wellness and disease management industries for
$761,463. The Company obtained funds for the HealthDesk acquisition from its
available cash. The assets that were acquired by the Company included inventory,
intellectual property, hardware and software.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Revenues are comprised of revenues from operations fees, development fees
and licensing fees. Revenues increased 14% from $2,062,373 for the year ended
December 31, 1997 to $2,344,072 for the year ended December 31, 1998. A summary
of these revenues by category is as follows:
December 31,
------------
1998 1997
---- ----
Revenues
- --------
Operations Fees ...................................... $1,385,720 $ 735,841
Development Fees ..................................... 689,157 826,532
Licensing Fees ....................................... 269,195 500,000
------- -------
Total Revenues ....................................... $2,344,072 $2,062,373
========== ==========
Revenues from operations increased 88% from $735,841 for the year ended
December 31, 1997 to $1,385,720 for the year ended December 31, 1998. Operations
revenues are generated as the Company provides services to its customers for
their disease-specific programs. Operations revenues increased significantly in
1998, as the Company continues to increase the membership levels in the
Company's disease state management programs and primarily from the Company's
demand management programs. The demand management programs operate from the
Company's medical call center which was established in May 1998, in Wayne,
Pennsylvania The medical call center is staffed by registered nurses on a 24
hour, 7 day a week schedule.
Revenues from development fees decreased 17% from $826,532 for the year
ended December 31, 1997 to $689,157 for the year ended December 31, 1998. The
Company received $689,157 in development revenues for the year ended December
31, 1998, related almost entirely to fees from Bristol-Myers for the development
of disease state management agreements. The Company also received development
revenues from a small number of other customers related to other
disease-specific programs. The Company has completed substantially all services
under these agreements and is currently receiving revenues in connection with
only the development of three programs. Development revenues include clinical,
technical and operational design or modification of the Company's primary
disease management programs. Development revenue declined from the year ended
December 31, 1997 to December 31, 1998 as the Company reduced its development
fees charged to certain customers. The Company anticipates that revenue from
development fees will continue to decline unless the Company enters into new
development agreements.
Revenues from licensing fees decreased 46% from $500,000 for the year ended
December 31, 1997 to $269,195 for the year ended December 31, 1998. Licensing
revenue represents amounts that the Company charges its customers, on a one-time
fee basis, for the right to enroll patients in or the right to license other
entities certain of its programs, primarily but not limited to, the Company's
standardized asthma and diabetes programs. The Company had licensing fees of
$99,750 from the sale of consumer healthcare software which are Internet based
products.
The Company also provides other services to customers in the healthcare
industry which involve new applications of its information capture and delivery
system. These services include patient surveys, health risk assessments, patient
satisfaction surveys, physician education programs and marketing support
functions.
Costs and Expenses
Cost of sales include salaries and related benefits, services provided by
third parties, and other expenses associated with the development of the
Company's customized disease state management programs, as well as the operation
of each of its disease state management programs.
Cost of sales increased 55% from $1,629,128 for the year ended December 31,
1997 to $2,529,619 for the year ended December 31, 1998. The increase in these
costs primarily reflects an increased level of program development and
operational activities, as well as the Company's creation of the capacity
necessary to handle anticipated increases in the number of individuals to whom
the Company provides services.
Sales and marketing expenses increased 12% from $1,609,837 for the year
ended December 31, 1997 to $1,795,921 for the year ended December 31, 1998.
These costs consist primarily of salaries, related benefits and travel costs,
sales materials and other marketing related expenses. Spending in this area has
remained consistent as the Company's sales and marketing staff has not expanded
during the twelve month period ended December 31, 1998. However, it is
anticipated that the Company will continue to invest in the sales and marketing
process, and that such expenses will increase in future periods.
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of the Company. General and administrative expenses increased 25% from
$2,442,269 for the year ended December 31, 1997 to $3,062,204 for the year ended
December 31, 1998. These expenditures were incurred to develop the corporate
infrastructure necessary to support anticipated program development and
operations. The increase in these costs was caused by an increase in the
Company's level of business activity, and the addition of required
administrative personnel. The Company expects that general and administrative
expenses will continue to increase in future periods.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to the Company's research and
development personnel for development of certain components of its integrated
information capture and delivery system, as well as development of the Company's
standardized disease state management programs. Research and development
expenses decreased 39% from $489,115 for the year ended December 31, 1997 to
$298,686 for the year ended December 31, 1998. The decrease in research and
development expenses reflects the Company's completion of the development of its
primary disease management programs.
The Company generates net investment income primarily from cash balances
and investments. Investment income decreased to $556,592 for the year ended
December 31, 1998 from $835,116 for the year ended December 31, 1997. The
decrease in interest income reflects the use by the Company of its available
cash and the reduction of proceeds that can earn interest.
The Company had a net loss of $4,829,467 for the year ended December 31,
1998 compared to $3,263,351 for the year ended December 31, 1997. This
represents a loss of $.60 per share for 1998 and $.41 for 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Revenues are comprised of revenues from development fees, operations fees
and licensing fees. Revenues increased 144% from $845,412 for the year ended
December 31, 1996 to $2,062,373 for the year ended December 31, 1997. A summary
of these revenues by category is as follows:
December 31,
------------
Revenues 1997 1996
- -------- ---- ----
Development Fees ..................................... $ 826,532 $ 798,138
Operations Fees ...................................... 735,841 11,718
Licensing Fees ....................................... 500,000 35,556
------- ------
Total Revenues ....................................... $2,062,373 $ 845,412
========== ==========
Revenues from development fees increased 3.6% from $798,138 for the year
ended December 31, 1996 to $826,532 for the year ended December 31, 1997. The
Company received $826,532 in development revenues for the year ended December
31, 1997, primarily related to fees from Bristol-Myers for the development of
six disease state management contracts. The Company also received development
revenues from a small number of other customers related to other
disease-specific programs. The Company has completed substantially all services
under these agreements and is currently receiving revenues in connection with
only the development of three programs.
The Company's development contracts generally require that payments be made
by the customer at the time of contract execution and at the achievement of
certain milestones in the development process. These payments are normally
received in advance of the Company's recognition of the associated revenue. The
timing of customer payments for program operation services varies by contract,
but typically occurs prior to the associated services being provided. The
Company recognizes deferred revenue for amounts billed for these services in
advance of the rendering of the services. The advance payments have been a
source of liquidity for the Company.
Revenues from operations increased 6180% from $11,718 for the year ended
December 31, 1996 to $735,841 for the year ended December 31, 1997. Operations
revenues are generated as the Company provides services to its customers for
their disease-specific programs. Operations revenues increased significantly in
1997, as the Company began enrolling patients and implementing its disease state
management programs during 1997. Operations revenue consisted primarily of
$440,000 in fees received from Abbott Laboratories in connection with a
teleconference program completed during the year ended December 31, 1997.
Revenues from licensing fees increased 1306% from $35,556 for the year
ended December 31, 1996 to $500,000 for the year ended December 31, 1997.
Licensing revenue represents amounts that the Company charges its customers for
the right to enroll patients in or the right to market to other entities certain
of its programs, primarily the Company's standardized asthma and diabetes
programs, and the right to have access to data collected from patients enrolled
in such programs. The Company did not initiate any licensing activity until the
second quarter of 1996, therefore licensing revenues for the year ended December
31, 1997 were significantly higher that those generated during the year ended
December 31, 1996. In 1997, the Company received licensing revenues of $150,000
from the PulseGroup, Inc. for a licensing contract related to the Company's
asthma and diabetes programs.
The Company began to provide other services to customers in the healthcare
industry during 1997 which involve new applications of its information capture
and delivery system. These services include patient surveys, health risk
assessments, nursing support lines and marketing support functions.
Costs and Expenses
Cost of sales include salaries and related benefits, services provided by
third parties, and other expenses associated with the development of the
Company's customized disease state management programs, as well as the operation
of each of its disease state management programs. In addition, cost of sales for
1997 and 1996 includes accrued losses on program development in accordance with
the Company's policy of recognizing such losses, if any, in full as identified.
The accrued loss for 1997 and 1996 is a result of a particular contract for
which the amount of the program development fee is based upon the success of the
program, and the fact that the guaranteed development revenue for this program
is less than the estimated cost of its development. To the extent that the
Company enters into any contracts of this type in the future, and that those
contracts provide for guaranteed development revenue which is less than the
estimated cost of program development, such losses will continue to be accrued.
Cost of sales increased 118% from $748,322 for the year ended December 31,
1996 to $1,629,128 for the year ended December 31, 1997. The increase in these
costs primarily reflects an increased level of program development and
operational activities.
Sales and marketing expenses increased 76% from $913,547 for the year ended
December 31, 1996 to $1,609,837 for the year ended December 31, 1997. These
costs consist primarily of salaries, related benefits and travel costs. These
expenditures allowed the Company to undertake initial marketing efforts to
pharmaceutical companies, payors and other health care services organizations.
The increase in these costs reflects an increase in the size of the Company's
sales and marketing staff.
General and administrative expenses include the costs of corporate
operations, finance and accounting, human resources and other general operating
expenses of the Company. General and administrative expenses increased 39% from
$1,759,044 for the year ended December 31, 1996 to $2,442,269 for the year ended
December 31, 1997. These expenditures were incurred to develop the corporate
infrastructure necessary to support anticipated program development and
operations. The increase in these costs was caused by an increase in the
Company's level of business activity, and the addition of required
administrative personnel.
Research and development expenses consist primarily of salaries and related
benefits and administrative costs allocated to the Company's research and
development personnel for development of certain components of its integrated
information capture and delivery system, as well as development of the Company's
standardized disease state management programs. Research and development
expenses increased 57% from $310,552 for the year ended December 31, 1996 to
$489,115 for the year ended December 31, 1997. The increase in these costs
reflects initiation of development of the Company's standardized disease state
management programs for patients suffering from asthma and diabetes.
The Company generates net interest income primarily from cash balances and
investments. Interest income increased to $835,116 for the year ended December
31, 1997 from $81,333 for the year ended December 31, 1996. The increase in
interest income reflects the additional funds available to the Company for
investment as a result of its initial public offering on December 19, 1996.
The Company had a net loss of $3,263,351 for the year ended December 31,
1997 compared to $2,806,436 for the year ended December 31, 1996. This
represents a loss of $.41 per share for 1997 and $.44 for 1996.
Liquidity and Capital Resources
At December 31, 1998 the Company had working capital of $7,992,894, as
compared to $13,242,387 at December 31, 1997. Since its inception the Company
has primarily funded its operations, working capital needs and capital
expenditures from the sale of equity securities. On December 19, 1996 the
Company completed an initial public offering of its common stock which generated
net proceeds to the Company of $14,082,048. On January 8, 1997, an additional
300,000 shares of common stock were sold pursuant to an underwriters
over-allotment provision, which generated net proceeds to the Company of
$2,232,000. The Company has continued to expend increasing amounts to expand its
operational capabilities including increasing its administrative and technical
costs. To the extent that revenues do not increase, the Company's losses will
increase, creating an increased burden on the Company's available capital. If
the Company is not able to operate profitably or to reduce its losses
significantly, it will be required to seek additional capital or reduce its
operations.
Capital expenditures during 1998 were $594,663, as compared to expenditures
of $394,161 during 1997 and $494,577 during 1996. The expenditures during these
periods represented the purchase of the significant technology platform
components of the integrated information capture and delivery system as well as
purchases required to support the Company's growing employee base.
The Company has been substantially dependent upon the public and private
sale of securities to fund its research and development activities and working
capital requirements. In order to implement programs using the Company's
integrated information capture and delivery system, the Company will be required
to devote substantial additional assets to the development of technology, the
construction of physical facilities and the acquisition of telephone and
computer equipment. The Company will also be required to retain the services of
employees in advance of obtaining contracts to provide services.
Inflation
Inflation did not have a significant impact on the Company's costs during
1998, 1997 or 1997. The Company continues to monitor the impact of inflation in
order to minimize its effects through pricing strategies, productivity
improvements and cost reductions.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activity, which is required to
be adopted by the Company in 2001. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges of underlying transactions must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Management has not yet
determined the effect SFAS No. 133 will have, if any, on the Company's
consolidated financial position, results of operations or cash flows.
Year 2000 Issues
The Year 2000 issue refers to the inability of computerized systems and
technologies to recognize and process dates beyond December 31, 1999. The
Company has reviewed the Company's information technology systems, cable network
equipment and other embedded technologies. A significant portion of the
Company's computerized systems and technologies have been developed, installed
or upgraded in recent years and are generally more likely to be Year 2000 ready.
The Company is also evaluating the potential impact as a result of its reliance
on third-party systems that may have year 2000 issues.
Computerized business applications that could be adversely affected by the
year 2000 issue include:
* information processing and financial reporting systems,
* customer billing systems,
* customer service systems,
* telecommunication transmission and reception systems, and
* facility systems.
System failure or miscalculation could result in an inability to process
transactions, send invoices, accept customer orders or provide customers with
products and services. Customers could also experience a temporary inability to
receive or use the Company's products and services.
The Company has developed a program to assess and address the year 2000
issue. This program consists of the following phases:
* inventorying and assessing the impact on affected technology and systems,
* developing solutions for affected technology and systems,
* modifying or replacing affected technology and systems
* testing and verifying solutions
* implementing solutions, and
* developing contingency plans.
The Company has substantially completed inventorying and assessing the
affected computerized systems and technologies. The Company is in various stages
of its year 2000 compliance program with respect to the remaining phases as it
relates to the affected systems and technologies. The Company has completed
adaptation of all internally created systems and has begun surveying its
customers and suppliers regarding their readiness for the year 2000. Final
testing to independently validate readiness will begin when the Company has
received all third party hardware and software promised to date.
Costs incurred to date directly related to addressing the year 2000 are
approximately $50,000. The Company currently estimates the total cost of its
year 2000 remediation program to be approximately $60,000. Although the Company
will continue to incur substantial capital expenditures in the ordinary course
of meeting its telecommunications system upgrade through the year 2000, it will
not specifically accelerate its expenditures to facilitate year 2000 readiness,
and accordingly such expenditures are not included in the above estimate.
The Company has begun communicating with others with whom it does
significant business to determine their year 2000 readiness and to determine the
extent to which the Company is vulnerable to year 2000 issues related to those
third parties. The Company purchases much of its technology from third parties.
There can be no assurance that the systems of other companies on which the
Company's systems rely will be year 2000 ready or timely converted into systems
compatible with the Company's systems. The Company's failure or a third party's
failure to become year 2000 ready or the Company's inability to become
compatible with third parties with which the Company has a material
relationship, may have a material adverse effect on the Company, including
significant service interruption or outages, however, the Company cannot
currently estimate the extent of any such adverse effects.
The Company is in the process of identifying secondary sources to supply
its systems or services in the event it becomes probable that any of its systems
will not be year 2000 ready prior to the end of 1999. The Company is also in the
process of identifying secondary vendors and service providers to replace those
vendors and service providers whose failure to be year 2000 ready could lead to
a significant delay in the Company's ability to provide its service to its
customers.
Forward Looking Statements
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result," "expects," "plans," "will continue," "is
anticipated," "estimated," "project," or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates primarily in its cash
transactions. The Company does not believe it is exposed to changes in foreign
currently exchange rates because it does not currently invest in foreign
currency instruments. A discussion of the Company's accounting policies for
financial instruments is included in the Summary of Significant Accounting
Policies in the Notes to the Financial Statements. The Company currently does
not have any international operations nor does invest its cash in foreign
currency instruments. The balances the Company has in cash or cash equivalents
are generally available without legal restrictions to fund ordinary business
operations. The Company regularly invests excess operating cash in certificates
of deposit and U.S. government bonds and other bonds that are subject to changes
in short-term interest rates. Accordingly, the Company believes that the market
risk arising from its holding of these financial instruments is minimal. The
Company made purchases of available-for-sale securities in the amounts of
$7,826,910 in 1998 and $18,121,444 in 1997.
Item 8. Financial Statements And Supplemental Data
Index to Financial Statements Page
Independent Auditors' Report 26
Balance Sheets 27
Statements of Operations 28
Statements of Stockholders' Equity 29
Statements of Cash Flows 30
Notes to Financial Statements 31-40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Patient Infosystems, Inc.:
We have audited the accompanying balance sheets of Patient Infosystems, Inc. as
of December 31, 1998 and 1997 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Patient Infosystems, Inc. at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Rochester, New York
February 5, 1999
(February 26, 1999 as to Note 10)
PATIENT INFOSYSTEMS, INC
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
ASSETS ..................................................
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 6,316,955 $ 779,317
Available-for-sale securities ......................... 1,029,674 12,232,335
Accounts receivable, net .............................. 1,320,626 412,956
Prepaid expenses and other current assets ............. 219,978 405,507
------- -------
Total current assets ............................ 8,887,233 13,830,115
PROPERTY AND EQUIPMENT, net ............................. 1,182,494 958,965
OTHER ASSETS ............................................ 450,000 247,393
------- -------
TOTAL ASSETS ............................................ $ 10,519,727 $ 15,036,473
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................... $ 304,436 $ 89,674
Accrued salaries and wages ............................ 277,931 320,272
Accrued expenses ...................................... 58,904 79,236
Deferred revenue ...................................... 253,068 67,549
Accrued loss on development contracts ................. -- 30,997
------- ------
Total current liabilities ....................... 894,339 587,728
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value: shares - authorized:
20,000,000; issued and outstanding: 1998 - 8,020,042
1997 - 8,011,522 .................................... 80,200 80,115
Additional paid-in capital ............................ 21,561,094 21,550,009
Other comprehensive income ............................ -- 5,060
Accumultated deficit .................................. (12,015,906) (7,186,439)
----------- ----------
Total stockholders' equity ...................... 9,625,388 14,448,745
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............. $ 10,519,727 $ 15,036,473
============ ============
See notes to financial statements.
PATIENT INFOSYSTEMS, INC
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
REVENUES ................................... $ 2,344,072 $ 2,062,373 $ 845,412
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of revenue .......................... 2,529,619 1,629,128 748,322
Sales and marketing ...................... 1,795,921 1,609,837 913,547
General and administrative ............... 3,062,204 2,442,269 1,759,044
Research and development ................. 298,686 489,115 310,552
------- ------- -------
Total costs and expenses ........... 7,686,430 6,170,349 3,731,465
--------- --------- ---------
OPERATING LOSS ............................. (5,342,358) (4,107,976) (2,886,053)
Other income ............................... 556,592 835,116 81,333
------- ------- ------
Loss before income taxes ................... (4,785,766) (3,272,860) (2,804,720)
Income taxes ............................... 43,701 (9,509) 1,716
------ ------ -----
NET LOSS ................................... $(4,829,467) $(3,263,351) $(2,806,436)
=========== =========== ===========
NET LOSS PER SHARE - BASIC
AND DILUTED ............................. $ (.60) $ (.41) $ (.44)
=========== =========== ===========
WEIGHTED AVERAGE COMMON
AND POTENTIAL COMMON SHARES ............. 8,018,398 7,980,094 6,347,716
========= ========= =========
See notes to financial statements
PATIENT INFOSYSTEMS, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additional Other Total
Preferred Stock Common Stock Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Income Defict Equity
------ ------ ------ ------ ------- ------ ------ ------
Balances, January 1, 1996 1,800,000 $18,000 3,602,880 $36,029 $ 2,227,788 $ -- $(1,116,652) $ 1,165,165
Sale of Series B convertible
preferred stock at $5.00 per share
in May and June 1996
(net of issuance costs
of $3,250) 600,000 6,000 -- -- 2,990,750 -- -- 2,996,750
Compensation expense related to
issuance of stock warrants -- -- -- -- 13,208 -- -- 13,208
Exercise of stock warrants -- -- 4,322 43 2,959 -- -- 3,002
Sale of common stock at $8.00
per share in December 1996
(net of issuance costs
of $1,917,952) -- -- 2,000,000 20,000 14,062,048 -- -- 14,082,048
Conversion of Series A and B
convertible preferred stock to
common stock (2,400,000)(24,000) 2,046,000 20,460 3,540 -- -- --
Comprehensive Income (loss)
Net loss for the year end
December 31, 1996 -- -- -- -- -- -- (2,806,436) (2,806,436)
-----------------------------------------------------------------------------------------------
Total Comprehensive loss -- -- -- -- -- -- -- (2,806,436)
-----------------------------------------------------------------------------------------------
Balances, December 31, 1996 -- -- 7,653,202 76,532 19,300,293 -- (1,116,652) 15,453,737
Sale of common stock at $8.00
per share in January 1997
(net of issuance costs
of $168,000) -- -- 300,000 3,000 2,229,000 -- -- 2,232,000
Compensation expense related
to issuance of stock warrants -- -- -- -- 8,283 -- -- 8,283
Exercise of stock options -- -- 58,320 583 12,433 -- -- 13,016
Comprehensive Income (loss)
Unrealized gain on investments
available-for-sale -- -- -- -- -- 5,060 -- 5,060
Net loss for the year end
December 31, 1997 -- -- -- -- -- -- (3,263,351) (3,263,351)
-----------------------------------------------------------------------------------------------
Total Comprehensive loss -- -- -- -- -- -- -- (3,258,291)
-----------------------------------------------------------------------------------------------
Balances, December 31, 1997 -- -- 8,011,522 80,115 21,550,009 5,060 (1,116,652) 14,448,745
Compensation expense related
to issuance of stock warrants -- -- -- -- 7,388 -- -- 7,388
Exercise of stock options -- -- 8,520 85 3,697 -- -- 3,782
Comprehensive Income (loss)
Unrealized loss on investments
available-for-sale -- -- -- -- -- -- -- (5,060)
Net loss for the year end
December 31, 1998 -- -- -- -- -- -- (4,829,467) (4,829,467)
-----------------------------------------------------------------------------------------------
Total Comprehnsive loss -- -- -- -- -- (5,060) -- (4,834,527)
-----------------------------------------------------------------------------------------------
Balances, December 31, 1998 -- $ -- 8,020,042 $80,200 $21,561,094 $ -- $(1,116,652) $ 9,625,388
===============================================================================================
See notes to financial statements.
PATIENT INFOSYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
OPERATING :
Net loss .................................................................. $ (4,829,467) $ (3,263,351) $ (2,806,436)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ......................................... 366,474 293,763 186,050
Loss on sale of property .............................................. 1,350 2,171 --
Amortization of premiums and discounts on available-for-sale securities (142,054) (209,832) --
Compensation expense related to issuance of stock warrants ............ 7,388 8,283 13,208
Increase in accounts receivable ....................................... (907,670) (26,741) (382,160)
Decrease (increase) in prepaid expenses and other current assets ...... 185,529 (234,980) (146,542)
Increase (decrease) in accounts payable ............................... 214,762 (107,000) (166,095)
(Decrease) increase in accrued salaries and wages ..................... (42,341) 193,243 78,770
(Decrease) increase in accrued expenses ............................... (20,332) (132,221) 192,076
Increase (decrease) in deferre+d revenue ............................... 185,519 (515,234) 414,728
(Decrease) increase in accrued loss on development contracts .......... (30,997) (36,142) 67,139
------- ------- ------
Net cash used in operating activities ........................... (5,011,839) (4,028,041) (2,549,262)
---------- ---------- ----------
INVESTING:
Property and equipment additions .......................................... (594,663) (394,161) (494,577)
Proceeds from sale of property ............................................ 3,310 1,299 --
Purchases of available-for-sale securities ............................... (7,826,910) (18,121,444) --
Maturities of available-for-sale securities ............................... 19,166,565 6,104,000 --
Increase in other assets .................................................. (202,607) (247,393) --
-------- -------- --------
Net cash provided by (used in) investing activities ............... 10,545,695 (12,657,699) (494,577)
---------- ----------- --------
FINANCING:
Proceeds from issuance of common and preferred stock, net ................. 3,782 2,245,016 17,081,800
(Decrease) increase in accrued initial public offering costs .............. -- (446,568) 446,568
----- -------- -------
Net cash provided by financing activities ....................... 3,782 1,798,448 17,528,368
----- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... 5,537,638 (14,887,292) 14,484,529
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ......................................................... 779,317 15,666,609 1,182,080
------- ---------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR ............................................................... $ 6,316,955 $ 779,317 $ 15,666,609
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid (received) for income taxes, net ............................... $ 43,701 $ (9,509) $ 1,716
============ ============ ============
See notes to financial statements.
PATIENT INFOSYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Patient Infosystems, Inc. ("the Company") designs and
develops health care information systems and services to manage,
collect and analyze patient-related information to improve patient
compliance with prescribed treatment protocols. Through its various
patient compliance programs for disease state management, the Company
provides important benefits for the patient, the health care provider
and the payor. The Company was incorporated in Delaware on February 22,
1995 under the name DSMI Corp., changed its name to Disease State
Management, Inc. on October 13, 1995, and on June 28, 1996 changed its
name to Patient Infosystems, Inc. Prior to January 1, 1997, the Company
was a development stage enterprise.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual amounts could differ
from those estimates.
Fair Value of Financial Instruments - The Company's financial
instruments consist of cash and cash equivalents and available-for-sale
securities. The carrying values of cash and cash equivalents and
available-for-sale securities approximate fair value.
Revenue Recognition and Deferred Revenue - The Company's principal
source of revenue to date has been from contracts with various
pharmaceutical companies and managed care organizations for the
development and operation of disease management programs for chronic
diseases, disease management programs and other health care information
system applications. Deferred revenue represents amounts billed in
advance under these contracts.
Development Contracts - The Company's program development contracts
typically require payment from the customer at the time that the
contract is executed, with additional payments made as certain
development milestones are met. Development contract revenue is
recognized on a percentage of completion basis, in accordance with the
ratio of total development cost incurred to the estimated total
development costs for the entire project. Losses, if any, are
recognized in full as identified.
Program Operations - The Company's program operation contracts call for
a per enrolled patient fee to be paid by the customer for a series of
program services as defined in the contract. The timing of customer
payments varies by contract, but typically occurs in advance of the
associated services being provided. Revenues from program operations
are recognized ratably as the program services are delivered.
Cash and Cash Equivalents - Cash and cash equivalents include all
highly liquid debt instruments with original maturities of three months
or less.
Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentration of credit risk consist principally
of cash and cash equivalents and accounts receivable. The Company
places its cash and cash equivalents with high credit quality
institutions.
The Company's current contracts are concentrated in a small number of
customers, consequently, the loss of any one of its customers could
have a material adverse effect on the Company and its operations.
During the years ended December 31, 1998 and 1997, approximately
$755,000 (33%) and $925,800 (45%), respectively, of the Company's
revenues arose from contracts with one customer. At December 31, 1998
and 1997, accounts receivable included balances of $736,650 and
$231,484, respectively, from contracts with that customer.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 10 years.
The Company regularly assesses all of its long lived assets for
impairment and recognizes a loss when the carrying value of an asset
exceeds its fair value. The Company determined that no impairment loss
need be recognized for applicable assets in 1998 or 1997.
Research and Development - Research and development costs consist
principally of compensation and benefits paid to Company employees. All
research and development costs are expensed as incurred.
Income Taxes - The Company uses the asset and liability method of
accounting for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Under the asset and liability method, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and net
operating loss and tax credit carryforwards.
Net Loss Per Share - Net loss per share is based on the weighted
average number of common shares outstanding subsequent to the Company's
initial public offering in 1996. Pursuant to rules of the Securities
and Exchange Commission Staff, all common and potential common shares
issued by the Company at a price less than the initial public offering
price during at least the 12 months preceding the offering date (using
the treasury stock method until shares are issued) have been included
in the calculation of common and potential common shares outstanding
for all periods presented prior to the December 1996 initial public
offering. (See Note 8)
Retirement Plan - The Company has a retirement plan which qualifies
under Section 401(k) of the Internal Revenue Code This retirement plan
allows eligible employees to contribute 1% to 15% of their income on a
pretax basis to the plan. The Company's annual contribution to the plan
is at the discretion of the Board of Directors. The Company made no
contributions to this plan in 1998 or 1997.
Stock Split - On November 22, 1996, the Company effected a .72-for-1
reverse stock split of all outstanding shares of common stock.
Statement of Financial Accounting Standards No. 130 - In 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income" and
restated the prior years' financial statements to conform to the new
reporting standard. This Statement establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. Comprehensive income for the Company includes net loss and
the unrealized gain or loss on available-for-sale securities.
Statement of Financial Accounting Standards No. 131 - In 1998, the
Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Statement requires that a
public company report financial and descriptive information about its
reportable operating segments using the management approach. SFAS also
requires that segment information of earlier years be restated to
conform to the new standard. The adoption of SFAS No. 131 had no effect
on the consolidated financial position, results of operations, or cash
flows of the Company.
Statement of Position 97-2 - In 1998, the Company adopted Statement of
Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The implementation of SOP
97-2 did not have a material effect on the Company's revenues or
earnings.
Statement of Financial Accounting Standards No. 133 - In June 1998, the
Financial Accounting Standards Bard issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activity, which is required to be
adopted by the Company in 2001. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges of underlying transactions must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
Management has not yet determined the effect SFAS No. 133 will have, if
any, on the Company's consolidated financial position, results of
operations or cash flows.
Reclassifications - Certain 1997 and 1996 amounts have been
reclassified to conform with 1998 presentations.
2. AVAILABLE -FOR-SALE SECURITIES
The following is a summary of available-for-sale securities at December
31:
1998 1997
---- ----
Certificates of Deposit $1,029,674 $ -
U.S. Government Securities - 12,232,335
---------- ----------
Total Available-for-Sale Securities $1,029,674 $12,232,335
========== ===========
Realized and unrealized gains and losses on available-for-sale
securities were immaterial as of and for the years ended December 31,
1998, 1997 and 1996.
The cost and estimated fair value of available-for-sale securities by
contractual maturity at December 31, 1998 and 1997 are as follows:
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less ................ $ 1,029,674 $ 1,029,674 $ 2,824,280 $ 2,823,704
Due after one year through two years ... -- -- 9,400,389 9,408,631
--------- --------- --------- ---------
$ 1,029,674 $ 1,029,674 $12,224,669 $12,232,335
=========== =========== =========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
1998 1997
---- ----
Computer software ............................ $ 545,467 $ 380,831
Computer equipment ........................... 795,996 600,279
Telephone equipment .......................... 301,172 189,479
Leasehold improvements ....................... 43,979 41,504
Office furniture and equipment ............... 363,387 249,291
------- -------
2,050,001 1,461,384
Less accumulated depreciation and amortization 867,507 502,419
------- -------
Property and equipment, net .................. $1,182,494 $ 958,965
========== ==========
4. INCOME TAXES
Income tax expense for the years ended December 31, 1998, 1997 and 1996
consists of:
1998 1997 1996
---- ---- ----
Current:
U.S. federal ............ $ -- $ -- $ --
State and local ......... 43,701 (9,509) 1,716
Deferred:
U.S. federal ............ -- -- --
State and local ......... -- -- --
------- ------- ------
Income Tax Expense (Credit) $43,701 $(9,509) $ 1,716
======= ======= =======
Income tax expense for the years ended December 31, 1998, 1997 and 1996
differed from the amounts computed by applying the U.S. federal income
tax rate of 34 percent as a result of the following:
1998 1997 1996
---- ---- ----
Computed "expected" tax expense ................. $(1,627,160) $(1,109,539) $ (953,605)
Increase in income taxes resulting from:
Change in the valuation allowance
for deferred tax assets .................. 1,628,997 1,094,833 949,726
State and local income taxes, net of federal
income tax benefit ....................... 28,843 (6,276) 1,133
Other, net ................................. 13,021 11,473 4,462
------ ------ -----
$ 43,701 $ (9,509) $ 1,716
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below.
1998 1997
---- ----
Deferred tax assets: .................................................
Accounts receivable, principally due
to allowance for doubtful accounts ................................. $ 20,000 $ 20,000
Deferred revenue ..................................................... 101,000 27,000
Compensation ......................................................... 89,000 67,000
Net operating loss carryforwards ..................................... 4,569,000 2,711,000
Tax credit carryforwards ............................................. 59,000 59,000
Other ................................................................ 20,000 12,000
------ ------
Total gross deferred tax assets ................................. 4,858,000 2,896,000
Less valuation allowance ........................................ (4,711,000) (2,737,000)
---------- ----------
Net deferred tax assets ......................................... 147,000 159,000
------- -------
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation
and amortization ................................................... (69,000) (66,000)
Other ................................................................ (78,000) (93,000)
Total gross deferred tax liability .............................. (147,000) (159,000)
-------- --------
Net deferred tax assets ......................................... $ -- $ --
=========== ===========
At December 31, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $11,437,000 which are
available to offset future federal taxable income, if any, through
2018. The Company also has investment tax credit carryforwards for
federal income tax purposes of approximately $59,000 which are
available to reduce future federal income taxes, if any, through 2018.
5. PUBLIC OFFERING OF COMMON STOCK
In December 1996, the Company sold 2,000,000 shares of common stock
through an initial public offering which generated net proceeds of
$14,082,048 after deducting applicable issuance costs and expenses. On
January 8, 1997, an additional 300,000 shares of common stock were sold
pursuant to an underwriters over-allotment provision, which generated
net proceeds to the Company of $2,232,000 after deducting underwriting
discounts and commissions.
In connection with this initial public offering, the Company's
outstanding shares of Series A and B convertible preferred stock were
converted into 2,046,000 shares of common stock.
6. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the "Stock Option Plan")
for the benefit of certain employees, non-employee directors, and key
advisors. The Company has adopted the disclosures-only provision of
SFAS No. 123, "Accounting for Stock-Based Compensation". No
compensation cost has been recognized for the Stock Option Plan as it
relates to employees since the exercise price of the options on the
date of grant approximated fair market value. Had compensation cost for
the Company's stock option plan been determined based on the fair value
at the date of grant for awards consistent with the provisions of SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
1998 1997 1996
---- ---- ----
Net loss - as reported .... $ (4,829,467) $ (3,263,351) $ (2,806,436)
Net loss - pro forma ...... $ (4,849,320) $ (3,406,973) $ (2,879,457)
Net loss per share - basic
and diluted - as reported $ (0.60) $ (0.41) $ (.44)
Net loss per share - basic
and diluted - pro forma . $ (0.60) $ (0.43 $ (.46)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model using an assumed risk-free
interest rates of 5.32% for year ended December 31, 1998, 5.98% for the
year ended December 31, 1997 and 7% for the year ended December 31,
1996 and an expected life of 7 years. As the Company was still
considered a private company for the purposes of applying SFAS No. 123
for the period from Inception to June 30, 1996, the Company did not
include a volatility factor assumption in its fair value model. For the
options granted after July 1, 1996, the Company has used a volatility
factor of .94 for year ended December 31, 1998, .53 for year ended
December 31, 1997 and .60 for year ended December 31, 1996. For
purposes of pro forma disclosure, the estimated fair value of each
option is amortized to expense over that option's vesting period. The
Stock Option Plan authorizes 1,080,000 shares of common stock to be
issued.
Stock options granted under the Stock Option Plan may be of two types:
(1) incentive stock options and (2) nonqualified stock options. The
option price of such grants shall be determined by a Committee of the
Board of Directors (the "Committee"), but shall not be less than the
estimated fair market value of the common stock at the date the option
is granted. The terms of the grants shall be fixed by the Committee,
with no term lasting longer than ten years. The ability to exercise
such options shall be determined by the Committee when the options are
granted. All of the outstanding options vest at the rate of 20% per
year with the exception of 36,000 options which were vested as of the
date of grant.
A summary of stock option activity follows:
Outstanding Weighted-Average
Options Exercise Price
------- --------------
Options outstanding at January 1, 1996 .................. 590,400 $ 0.33
Options granted during the year ended December 31, 1996
(weighted average fair value of $3.24) ................ 365,400 $ 5.32
Options forfeited by holders during the year
ended December 31, 1996 ............................... (63,840) $ 0.87
-------
Options outstanding at December 31, 1996 ................ 891,960 $ 2.34
Options granted during the year ended December 31, 1997
(weighted average fair value of $5.16) ................ 307,000 $ 4.39
Options forfeited by holders during the year
ended December 31, 1997 ............................... (342,580) $ 4.83
Options exercised during the year ended December 31, 1997 (58,320) $ 0.22
-------
Options outstanding at December 31, 1997 ................ 798,060 $ 2.21
Options granted during the year ended December 31, 1998
(weighted average fair value of $1.38) ................ 399,200 $ 1.38
Options forfeited by holders during the year
ended December 31, 1998 ............................... (320,820) $ 3.15
Options exercised during the year ended December 31, 1998 (8,520) $ 0.44
------
Options outstanding at December 31, 1998 ................. 867,920 $ 0.91
-------
Options exercisable at December 31, 1998 ................. 290,816 $ 0.49
-------
Options available for grant at December 31, 1998 ........ 212,080
-------
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- -------------- ----------- ---- ----- ----------- -----
$.14 - $.99 376,200 1.29 $ .30 240,120 $ 0.29
$1.00 - $1.99 488,740 4.07 $ 1.37 47,716 $ 1.36
$2.00 - $4.99 2,980 -- $ 3.15 2,980 $ 3.15
----- -----
867,920 290,816
======= =======
The Company also has outstanding stock purchase warrants entitling the
holders to purchase a total of 23,400 shares of common stock at a price
of $1.38 per share (weighted average exercise price of $1.38). At
December 31, 1998, 9,360 of these warrants are currently vested, with
the remaining 14,040 warrants vesting at 20% per year. The Company has
recorded compensation costs in connection with the issuance of these
warrants for the years ended December 31, 1998, 1997 and 1996 in the
amount of $7,388, $8,283 and $13,208 respectively.
7. COMMITMENTS
The Company leases office space for its main operating facility in
Rochester, New York, under an operating lease agreement expiring in
November 1999. Additionally, the Company subleases office space for its
Wayne, Pennsylvania facility under an operating lease agreement
expiring in May 2001 and leases office space for its Berkeley,
California facility under an operating lease agreement expiring in
October 1999. Rent expense from these leases for the years ended
December 31, 1998, 1997 and 1996 was $210,375, $154,907 and $70,479
respectively.
At December 31, 1998, future minimum lease payments under these leases
are summarized as follows:
1999 $ 253,301
2000 40,200
2001 16,750
------
$ 310,251
=========
8. NET LOSS PER SHARE
Net loss per share is based on weighted average number of common shares
outstanding subsequent to the Company's initial public offering in
1996. Pursuant to rules of the Securities and Exchange Commission
Staff, all common and potential common shares issued by the Company at
a price less than the initial public offering price during at least the
12 months preceding the offering date (using the treasury stock method
until shares are issued) have been included in the calculation of
common and potential common shares outstanding for all periods
presented prior to the December 1996 initial public offering. Because
the Company incurred a loss in 1998 and 1997, outstanding options to
purchase 867,920 and 798,060 shares of common stock at $.14 to $4.99
per share, were not included in the computation of diluted loss per
share as they would be antidilutive.
Net Loss Shares Per-Share
Numerator Denominator Amount
--------- ----------- ------
For the year ended December 31, 1998
Basic and diluted ................................................ $(4,829,467) 8,018,398 $ (0.60)
=========== ========= ========
For the year ended December 31, 1997
Basic and diluted ................................................ $(3,263,351) 7,980,094 $ (0.41)
=========== ========= ========
For the year ended December 31, 1996
Loss available to Common Shareholders ............................ $(2,806,436)
Weighted average common stock outstanding ........................ 3,678,435
Series A Convertible Preferred Stock ............................. 1,296,000
Series B Convertible Preferred Stock ............................. 437,500
Potential common shares calculated
using the treasury stock method:
Series B Convertible Preferred
Stock issued May and June 1996 ............................ 177,365
Common stock options ........................................ 758,416
-------------------------------------
Basic and diluted ................................................ $(2,806,436) 6,347,716 $ (0.44)
=========== ========= ========
9. JOINT VENTURE
On November 12, 1998, the Company entered into a joint venture
agreement with MacLean Hunter Publishing Limited to market and sell, on
an exclusive basis in Canada, products and services developed by the
Company and to jointly manage, finance and operate the business entity
Patient Infosystems Canada, Inc., which is dedicated to the development
of a commercially viable business built around the sale, marketing and
service of the Company's products and services.
10. SUBSEQUENT EVENT
On February 26, 1999, the Company, through its newly formed,
wholly-owned subsidiary, Patient Infosystems Acquisition Corp.,
acquired substantially all of the assets of HealthDesk Corporation, a
consumer healthcare software company primarily engaged in the business
of designing and developing Internet based products in the healthcare,
wellness and disease management industries. The acquired assets include
inventory, intellectual property, hardware and software. The principal
consideration paid for the transaction was $761,463. The Company paid
for the acquisition using its available cash.
11. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited interim results of
operations by quarter:
First Second Third Fourth
----- ------ ----- ------
Year ended December 31, 1998:
Revenues ..................................................... $ 290,354 $ 874,119 $ 465,181 $ 714,418
Gross margin ................................................. (94,933) 324,848 (243,116) (172,346)
Net loss ..................................................... (1,055,038) (680,017) (1,348,843) (1,745,569)
Net loss per common share .................................... (0.13) (0.08) (0.17) (0.22)
Year ended December 31, 1997:
Revenues ..................................................... $ 523,477 $ 570,330 $ 433,059 $ 535,507
Gross margin ................................................. 172,407 35,839 34,363 190,636
Net loss ..................................................... (588,524) (892,906) (1,097,562) (684,359)
Net loss per common share .................................... (0.07) (0.11) (0.14) (0.09)
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
Item 11. Executive Compensation.
Director Compensation
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
Executive Compensation
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
The financial statements of the Company are included in Part II, Item
8.
(b) Reports on Form 8 - K:
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1998.
(c) Exhibits:
Exhibit # Description of Exhibits
(3) Articles of Incorporation and By-Laws:
Certificate of Incorporation
Incorporated herein by reference from Exhibit 3.1 on Form S-1
Registration Statement of the Company, filed with the
Commission on December 17, 1996.
By-Laws
Incorporated herein by reference from Exhibit 3.3 on Form S-1
Registration Statement of the Company, filed with the
Commission on December 17, 1996.
(10) Material contracts:
10.15 Asset Purchase Agreement dated as of September 29, 1998
among Patient Infosystems Acquisition Corp., the Company and
HealthDesk Corporation.
10.16 Amendment to Asset Purchase Agreement dated as of December
1, 1998 among Patient Infosystems Acquisition Corp., the Company
and HealthDesk Corporation.
10.17 Second Amendment to Asset Purchase Agreement dated as of
February 1, 1999 among Patient Infosystems Acquisition Corp., the
Company and HealthDesk Corporation.
10.18 Sublease dated as of September 29, 1998 between HealthDesk
Corporation and Patient Infosystems Acquisition Corporation.
10.19 Consulting Agreement dated as of March 8, 1999 between the
Company and John V. Crisan.
10.20 Lease Agreement dated as of February 22, 1995 between the
Company and Conifer Prince Street Associates.
10.21 First Addendum to Lease Agreement dated as of August 22,
1995 between the Company and Conifer Prince Street Associates.
10.22 Second Addendum to Lease Agreement dated as of November 17,
1995 between the Company and Conifer Prince Street Associates.
10.23 Third Addendum to Lease Agreement dated as of March 28,
1996 between the Company and Conifer Prince Street Associates.
10.24 Fourth Addendum to Lease Agreement dated as of October 29,
1996 between the Company and Conifer Prince Street Associates.
10.25 Fifth Addendum to Lease Agreement dated as of November 30,
1996 between the Company and Conifer Prince Street Associates.
10.26 Sixth Addendum to Lease Agreement dated as of November 24,
1997 between the Company and Conifer Prince Street Associates.
10.27 Sublease Agreement dated as of March 30, 1998 between the
Company and Medecision, Incorporated.
10.28 Joint Venture and Stockholders Agreement dated as of
November 12, 1998 between the Company and Maclean Hunter
Publishing Limited.
10.29 Lease Agreement dated as of October 12, 1998 between the
Company and Parker Associates.
(11) Statement of Computation of Per Share Earnings
(21) Subsidiaries
(27) Financial Data Schedule
Filed electronically
All other exhibits are omitted because they are not applicable or the
required information is shown elsewhere in this Annual Report on Form
10-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATIENT INFOSYSTEMS, INC.
By: /s/ Donald A. Carlberg April 13, 1999
---------------------- --------------
Donald A. Carlberg Date
Director, President, and Chief Executive Officer
Pursuant to the requirements the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ Donald A. Carlberg April 13, 1999
- -------------------------- --------------
Donald A. Carlberg Date
Director, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ John V. Crisan April 13, 1999
- ---------------------- --------------
John V. Crisan Date
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Derace L. Schaffer, M.D. April 13, 1999
- -------------------------------- --------------
Derace L. Schaffer, M.D. Date
Chairman of the Board
By: /s/ John Pappajohn April 13, 1999
- ---------------------- --------------
John Pappajohn Date
Director
By: /s/ Barbara J. McNeil, M.D., Ph.D. April 13, 1999
- -------------------------------------- --------------
Barbara J. McNeil, M.D., Ph.D. Date
Director
By: /s/ Carl F. Kohrt, Ph.D. April 13, 1999
- ---------------------------- --------------
Carl F. Kohrt, Ph.D. Date
Director
By: /s/ David B. Nash, M.D. April 13, 1999
- --------------------------- --------------
David B. Nash, M.D. Date
Director